Unsecured Unlisted NCDs to Companies Can Qualify for Inter-Corporate Deposit Exclusion

Unsecured NCDs to a Company – Deposit or Exempt under Rule 2(1)(c)(vi)?

1. Summary: Unlisted companies, particularly within a group, frequently raise funds from a holding, fellow subsidiary or associate company by issuing unsecured non-convertible debentures (NCDs) instead of taking a plain loan. The instrument gives both sides a structured, transferable document with a fixed coupon and redemption date. A recurring concern, however, is whether such money becomes a “deposit” under Chapter V of the Companies Act, 2013, because unsecured and unlisted NCDs do not satisfy the two exclusions in the Deposit Rules that specifically talk about debentures.

The answer lies in the way the law defines “deposit”. The definition first captures every receipt of money and then lists categories that are “not a deposit”. Each of these categories operates on its own. If a transaction fits even one of them, it falls outside the deposit regime, and the company is free to rely on the one it qualifies for. One such category is money received from another company, and that category does not depend on the form in which the money is received. The practical takeaway is that unsecured, unlisted NCDs subscribed by a company can be kept outside the deposit net by relying on Rule 2(1)(c)(vi), without converting the arrangement into a plain loan, provided the debenture-related compliances and a few safeguards are properly followed.

2. Short Answer

An amount raised by an unlisted company by issuing unsecured NCDs to another company is excluded from “deposit” under Rule 2(1)(c)(vi) of the Companies (Acceptance of Deposits) Rules, 2014, which excludes any amount received by a company from any other company, irrespective of the instrument used. The fact that the NCDs do not qualify under sub-clause (ix) (secured or compulsorily convertible) or sub-clause (ixa) (listed unsecured NCDs) does not matter, because the exclusions are independent alternatives. There is no need to avoid debentures and take a plain loan to get this benefit. The subscriber must be a “company” under the Act, the NCDs should remain with companies, the amount must be reported in Form DPT-3, and the Section 42/71 requirements for issuing debentures must be complied with.

3. Applicable Legal Provisions

• Section 2(31) of the Companies Act, 2013 – the parent definition of “deposit”, which leaves the exclusions to be prescribed by rules in consultation with the RBI.
• Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 (“Deposit Rules”) – restates the definition and lists the amounts that are not deposits in sub-clauses (i) to (xviii), including sub-clause (ixa). The sub-clauses directly relevant here are:
  • Sub-clause (vi) – any amount received by a company from any other company (source-based exclusion).
  • Sub-clause (ix) – bonds/debentures secured by a first or pari passu charge on tangible assets (with value cap), or compulsorily convertible into shares within ten years (instrument-based exclusion).
  • Sub-clause (ixa) – unsecured NCDs listed on a recognised stock exchange as per SEBI regulations (instrument-based exclusion, inserted w.e.f. 29.06.2016).
• Section 2(20) – meaning of “company”, i.e. a company incorporated under the Companies Act, 2013 or any previous company law. This decides who can be the subscriber for sub-clause (vi).
• Section 2(30) – meaning of “debenture”, which includes any instrument of a company evidencing a debt, whether or not it creates a charge on assets (proviso inserted by the Companies (Amendment) Act, 2017, effective 09.02.2018).
• Section 73 – prohibits acceptance of deposits except in the manner provided in Chapter V; Section 76A – punishment for contravention of Section 73 or 76.
• Rule 16 of the Deposit Rules – annual return in Form DPT-3, which also requires particulars of receipts that are not treated as deposits.
• Section 42 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 – private placement of securities, including debentures; Rules 9A/9B of the same Rules – dematerialisation of securities of unlisted public companies and private companies (other than small companies).
• Section 71 read with Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 – issue of debentures and debenture redemption reserve.
• Sections 179(3)(c) and 180(1)(c) – Board approval for issue of debentures, and shareholder approval where borrowings exceed the prescribed limit.
• Section 186 – on the subscriber’s side, since subscribing to debentures is an acquisition of securities of another body corporate.

4. Relevant Extracts (Simplified)

Section 2(31) – Deposit

“Deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

Rule 2(1)(c)(vi) – Inter-corporate receipts

Deposit does not include any amount received by a company from any other company.

Rule 2(1)(c)(ix) – Secured or convertible debentures (simplified)

Deposit does not include amounts raised by bonds or debentures secured by a first or pari passu charge on assets (other than intangibles), or compulsorily convertible into shares within ten years. Secured debentures cannot exceed the market value of the charged assets as assessed by a registered valuer.

Rule 2(1)(c)(ixa) – Listed unsecured NCDs (simplified)

Deposit does not include amounts raised by NCDs that do not create a charge on assets and are listed on a recognised stock exchange as per SEBI regulations.

5. Legal Position

5.1 How the definition of “deposit” is built

The definition works in two layers. The first layer is deliberately wide: any receipt of money, whether called a deposit, a loan or anything else, is a deposit. The second layer takes things out. Rule 2(1)(c) lists the amounts that are not deposits, and this list is exhaustive. Nothing in the rule says that a transaction must pass through one particular sub-clause, and none of the sub-clauses says that it applies “only” to a certain instrument or overrides another sub-clause. Each sub-clause is an independent gateway out of the deposit regime.

This is where the company’s choice comes in. If a transaction is covered by the wide first layer, the company is entitled to look at the full list of exclusions and rely on whichever one it genuinely satisfies. Failing one exclusion does not shut the door on another. That is the ordinary way a list of exemptions is read, and it is also how practitioners routinely apply it, for example, when a loan from a director is kept outside deposits under sub-clause (viii) rather than any other sub-clause.

5.2 Two different kinds of exclusions

The exclusions fall into two distinct categories, and it helps to keep them separate:

• Instrument-based exclusions look at the nature of the instrument, whoever the investor is. Sub-clauses (ix) and (ixa) are examples: secured or compulsorily convertible debentures, and listed unsecured NCDs, are not deposits even if subscribed by members of the public.
• Source-based exclusions look at who is providing the money, whatever the instrument. Receipts from the Government (sub-clause (i)), foreign lenders under FEMA (sub-clause (ii)), banks (sub-clause (iii)), public financial institutions (sub-clause (iv)), other companies (sub-clause (vi)) and SEBI-registered AIFs and mutual funds (sub-clause (xviii)) fall here.

An unsecured, unlisted NCD fails both instrument-based exclusions. That settles the position only for NCDs issued to non-corporate investors such as individuals, firms or trusts. Where the subscriber is a company, the source-based exclusion in sub-clause (vi) is independently available.

5.3 Where an unsecured, unlisted NCD subscribed by a company stands

5.4 Why the debenture form does not take the amount out of sub-clause (vi)

Section 2(31) itself brings in money received “in any other form”. Subscription money for debentures is simply money received in another form. Sub-clause (vi) excludes “any amount” received from another company, and the word “any” is not qualified by the mode of receipt. Reading sub-clause (vi) as if it said “any loan, other than by way of debentures” would add words that the rule-maker did not use.

The same reasoning is already accepted for sub-clause (iii). Unsecured NCDs subscribed by a bank are generally regarded as excluded because the money comes from a bank, not because the instrument is secured or listed. Sub-clause (vi) is drafted in the same source-based manner.

The result also fits the purpose of Chapter V. The deposit regime protects members of the public who place money with companies. Inter-corporate funding takes place between commercially informed entities, each governed by its own Board and by Section 186 on the lending side. If a plain inter-corporate loan is outside the deposit net, it would be anomalous to treat the same money as a deposit merely because it is documented through a more formal, regulated instrument. A reading that allows genuine business funding while keeping public money protected is both acceptable to corporates and in the interest of society.

6. Example

ABC Private Limited, an unlisted company, needs ₹5 crore for working capital. XYZ Limited, a fellow subsidiary, agrees to subscribe to 50 unsecured NCDs of ₹10 lakh each, carrying interest at 9% per annum and redeemable after three years. The NCDs are not listed and no charge is created.

The NCDs fail sub-clauses (ix) and (ixa). However, the money is received by ABC from XYZ, which is a company, so sub-clause (vi) applies and the ₹5 crore is not a deposit. ABC passes the required resolutions, issues the PAS-4, allots the NCDs in demat form, files PAS-3, and reports the ₹5 crore in its DPT-3 as an amount received from another company. The offer letter restricts transfer to companies only. XYZ, on its side, records the investment under Section 186. If XYZ later sought to transfer the NCDs to an individual, the transfer restriction would prevent the exclusion from being put at risk.

7. Conclusion

After reading this article, one thing becomes clear. Unsecured NCDs of an unlisted company do not get any exemption on their own under the Deposit Rules, because they are neither secured nor listed. But when these NCDs are taken by another company, the money comes from a company. The inter-corporate exemption under Rule 2(1)(c)(vi) then applies, and the amount is not a deposit.

The law gives a company more than one way out of the deposit definition. If a company fits into more than one exemption, it is free to pick any of them. Nothing in the law forces it to use only the exemptions written for debentures. So the company should look at all the exemptions, see which ones it fits into, and choose the one that is best for the company and its stakeholders.

8. Frequently Asked Questions

Q1. Does the NCD have to be secured to escape the deposit definition?

No. Security matters only if the company relies on sub-clause (ix). If the subscriber is a company, sub-clause (vi) applies without any security.

Q2. What if the subscriber is an LLP or a partnership firm?

Sub-clause (vi) will not apply, because an LLP or a firm is not a “company” under Section 2(20). The company must then find another exclusion (for example, secured or listed NCDs) or comply with the deposit provisions.

Q3. What happens if the corporate holder transfers the NCDs to an individual?

The rule does not expressly deal with this. The safer view is that the exclusion may be lost from the date the NCDs are held by a non-company. This is why a transfer restriction to companies only is recommended in the terms of issue.

Q4. Is DPT-3 required even though the amount is not a deposit?

Yes. Rule 16 requires every company (other than a Government company) to report particulars of receipts not treated as deposits in Form DPT-3.

Q5. Would a plain inter-corporate loan be a safer choice?

Both are excluded under the same sub-clause. A plain loan involves fewer compliances and attracts no debate on the point discussed above. The NCD route is preferred where the parties want a transferable, structured instrument. The choice is commercial, not a condition for the exclusion.

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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [email protected]).